What is a Tax Credit?

A tax credit is a credit issued by the government that enables a taxpayer to reduce his or her tax burden. A tax credit reduces tax liability on a dollar for dollar basis, whereas a tax deduction only reduces the amount of income subject to tax. This makes a tax credit much more valuable than a tax deduction in the eyes of a taxpayer. The value of a tax credit is set by the government, and certain types of tax credits are granted only to individuals or businesses in specific locations or industries.

There are a number of tax credits that an individual may come across during tax season, including the Child and Dependent Care Credit and the Lifetime Learning Credit. Furthermore, in an effort to encourage business development, the government provides tax credits for investments in certain projects. Several state and federal tax credits are available to incentivize business growth, but three are particularly relevant to Northwest Louisiana.

Local residents may be familiar with film tax credits. The boom in movies being made in Northwest Louisiana is due in part to the Louisiana Motion Picture Investor Tax Credit. Film production companies can earn up to a 30% tax credit on production expenditures in Louisiana, plus a 5% tax credit for payroll expenditures to Louisiana residents.

Additionally, historic tax credits are available from both the federal and state government for the rehabilitation of qualified historic buildings. Qualified historic buildings are buildings listed on the National Register of Historic Places or contribute to a national or local historic district. Shreveport, Bossier City and Mansfield combined have seven historic districts and numerous landmarks listed in the National Register. The Federal Historic Preservation Tax Inventive provides a 20% tax credit on the qualified expenditures in the renovation of a historic building. Thus, if a developer spends $5 million on qualified expenditures, $1 million in federal tax credits would be available to offset federal income taxes owed by the developer or its partners. Also, Louisiana has a 25% State Commercial Tax Credit that can be earned in addition to the federal historic tax credit and used reduce state tax liability.

Finally, new markets tax credits are designed to spur new investments into operating businesses and real estate projects in traditionally underserved areas. New markets tax credits attract investment capital to underserved communities by permitting investors to receive a 39% tax credit against their federal income tax return in exchange for making equity investments in specialized financial institutions called Community Development Entities. Most of Shreveport, Bossier City, Mansfield, and Minden qualify as traditionally underserved areas, making Northwest Louisiana a prime candidate for the use of new markets tax credits.

All of the tax credits above are subject to different regulatory frameworks. Therefore, a business interested in tax credits should consult its tax and legal advisors to determine its potential to receive and/or monetize tax credits.

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Logan Schroeder is an attorney at Cook, Yancey, King & Galloway. He is a member of its business and corporate section, specializing in real estate development and finance.